In two years or possibly even in six months, many corn producers will recognize that $7.50 corn may well have been the worst thing that has happened to them in the last 10 years. I’ve said before that I am of very strong opinion that corn prices are in the midst of the biggest bear market in history. I am sure some readers have laughed at such a statement and others have thought I have lost my mind. I am convinced that $7.50 corn is actually going to be one of the worst things that has happened to a Midwest corn farmer in a long time.
Don’t let that frighten you. And don’t jump off a cliff. I throw that number out there more for conversation purposes than an outright prediction. On the other hand, if history repeats itself, that is likely the downside target for soybeans. This is a potentially very bearish situation soybean producers could be facing in the next several months.
As 2012 came to an end and we move forward into 2013, soybean prices have rarely traded at a price ratio this low relative to corn. And when they did, it did not last long. This all but guarantees another year of huge volatility in the corn and soybean market. Bulls can conclude that this means soybeans are going a lot higher. Bears will conclude that this means corn is going a lot lower. The majority may conclude it will be some of both.
Forecasting and decision-making in 2012 turned out to be a difficult year for many as the drought changed market direction for many commodities. 2013 will likely see continued volatility and tough decisions. There are three key fundamentals that will likely affect all of our decisions, and these fundamentals are essentially out of our control.
One universal truth is that better decisions are made more frequently during bad economic times and poor profits than during good economic times and great profits. When profits aren’t great, people buckle down and analyze all expenses and all risk. When profits are big and business owners are flush with cash, this often leads to reckless decision-making because the decision maker feels “bulletproof.”
For the last couple of years, U.S. farmers have been insulated from the global financial crisis. How much longer can this separation continue, and are we on the verge of sharing in some of these economic “issues?” Let’s take a quick look at some of the long-term trends and who the important players are in the world.
A magazine editor once told me that she could take some of my educational articles that I wrote 30 years ago, rerun them today and other than changing the prices, no one would know the difference. She’s correct. Markets change and prices change – but people don’t. The human psychology element of marketing is the same now as it was 30 years ago.
As of late August, cash corn prices in many areas are above $8.50/bu. Demand is being cut in some areas, but not fast enough. The question on everyone’s mind is, “What price will it take to cut demand with yields so low?”
Actually, I’m not going to answer that. No one knows for sure. But I will give you reason to at least be concerned that the ag economy is making a bubble and that these grain prices are not going to last. As the drought hit, the fundamentals of the corn and soybean market changed dramatically, and this was one surge in prices that we did not need for the long-term benefit of grain producers’ profits.
Will this boom turn into a bust as all others have? There have basically been two boom bust cycles in agriculture. The first was during the 1910s that resulted from sharply rising export demand during World War I. Farm incomes surged and farmland prices increased significantly. That soon turned into a bust.
No matter what the business or sport, good decisions require confidence. A trader in the stock market will not make good decisions if he has lost his confidence. A professional basketball player or football player doesn’t perform as well if he’s lost confidence in his ability.
Following the Jan. 12 crop report, the industry was in shock that the numbers were not as bullish as anticipated. Granted, the trend in usage in both corn and soybeans is in the wrong direction, but this does not make the 2012 crop any less significant.
Since Sept. 1, many producers have watched and some ignored the fact that corn prices have dropped by over $2/bu. and soybeans approximately $3.50/bu. While some may think this is a short-term correction in a long-term bull market, I am not in that camp.